The short answer
Yield maintenance is a prepayment premium designed to give the lender the yield it would have earned had the loan run to term, typically the present value of the gap between the loan's interest rate and a current Treasury yield over the remaining term. It applies when you repay a fixed-rate commercial loan early, as you usually must when you sell. The IRS treats a mortgage prepayment penalty as deductible interest, but published guidance does not settle whether paying it from exchange proceeds is an exchange expense.
At a glance
| What it compensates | Interest the lender loses between prepayment and maturity or the open period |
|---|---|
| Discount rate | A Treasury yield matched to the remaining term |
| Floor in agency multifamily loans | The greater of 1% of the balance or yield maintenance |
| Income tax treatment | IRS guidance treats a mortgage prepayment penalty as interest |
The formula is set by the loan documents, and they follow a common pattern.
A CMBS prospectus filed with the SEC in 2025 describes the usual mechanics. One version is the amount by which the present value of the remaining scheduled payments, discounted at a Treasury yield, exceeds the outstanding balance. Another computes the interest on the prepaid amount at the difference between the loan rate and the Treasury rate and discounts it. The Treasury rate is interpolated from the Federal Reserve's H.15 constant-maturity yields for the maturities nearest the loan's.
The Fannie Mae Multifamily Guide states that loan documents generally require, for a prepayment before the yield maintenance period end date, a premium equal to the greater of 1% of the unpaid balance or yield maintenance. Loans typically open for prepayment without premium shortly before maturity; in the prospectus reviewed, that open period ran roughly three to seven months.
A hypothetical: estimating the premium.
Hypothetical figures: a $3,000,000 interest-only loan at 6.0% with four years left, and a matching Treasury yield of 4.0%. The lender loses 2% a year, or $5,000 a month, for 48 months: $240,000 before discounting. Discounted monthly at 4%, that is about $221,000, which beats the $30,000 floor of 1%.
If Treasury yields rise to the loan rate, the yield maintenance figure falls toward zero and any 1% floor in the documents controls. If they fall further, the premium grows, which is why the same loan can be cheap to exit one year and expensive the next. The premium is paid from the sale proceeds, so it also reduces the cash that reaches your qualified intermediary. Run your own numbers with your CPA.
It bites on sale timing and in the exchange accounting.
IRS Publication 535 says that if you pay off a mortgage early and pay the lender a penalty, you can deduct the penalty as interest, and Publication 936 says the same for a home mortgage. Interest is an income tax deduction, not a cost of selling, which is why its place in the exchange is uncertain.
The transactional items that Reg. section 1.1031(k)-1(g)(7)(ii) lets you pay from proceeds without disturbing the safe harbors are commissions, prorated taxes, recording or transfer taxes and title fees; a prepayment premium is not named. Agree the treatment with your CPA, and compare the alternatives: a sale timed for the open period, a buyer who assumes the loan, or defeasance. Timing decisions are covered in refinance timing and the 1031.
Related questions
Can yield maintenance be zero?
It can approach zero when Treasury yields are at or above the loan rate, because the lender can reinvest at no loss. Many documents set a floor, such as the 1% minimum described in the Fannie Mae guide.
Is yield maintenance deductible?
Publication 535 treats a penalty for paying off a mortgage early as deductible interest. Interest limits and the exchange treatment still apply, so confirm with your CPA.
How is it different from defeasance?
Yield maintenance is cash paid to prepay the loan. Defeasance keeps the loan alive and swaps the collateral for government securities, which is typical in securitized loans.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- SEC EDGAR, commercial mortgage pass-through certificates prospectus (Form 424B2, filed September 30, 2025)
- Fannie Mae Multifamily Guide, Reporting and Remitting (sections 213, 214 and 218)
- IRS, Publication 535, Business Expenses (2022), Interest
- IRS, Publication 936, Home Mortgage Interest Deduction (2025)
- 26 CFR 1.1031(k)-1, Treatment of deferred exchanges (Cornell LII)